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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Can Iraq Challenge Saudi Arabia’s Regional Oil Dominance?

  • Iraq is looking to ramp up its oil production to 7 million bpd by 2027.
  • The country is focusing on increasing production from two key oil fields, Rumaila and West Qurna 2.
  • There is much potential left in the area as the Rumaila field, despite it having already produced around 80 percent of all of Iraq’s cumulative oil production to date.

Like the first cuckoo of spring, the annual autumn refrain from senior Iraqi oil officials of new production targets has that pleasant ring of the familiar about it to seasoned oil industry watchers. Sometimes it is 6 million barrels per day (bpd), sometimes 7, and sometimes 8, but it always prompts an analysis of the facts and figures that invariably lead to the same conclusion: it could be done but not without some basic changes to Iraq’s oil industry. Last week was heard a similar call as Europe faces an uncertain energy future heading into winter, this time from Alaa Alyasri, director general of Iraq’s State Oil Marketing Organization (SOMO). Iraq is targeting 7 million bpd of crude oil in 2027 - wonderful. And yet, as in many a musical show-stopping melody, seasoned oil watchers may well wonder if maybe it will be different this time around.

What may make it different is that the Iraqis are focussing on increasing production from two key oil fields – Rumaila and West Qurna 2 – where the countries operating them have every reason to make the planned increases work and no qualms about what is required to make them happen. It is apposite to note at this point that by far, the main reason why Iraq is not producing even 13 million bpd right now is that its oil industry appears to be regarded by many at the top levels of its various bureaucracies as part of their personal pension funds. Starting most notably with ExxonMobil’s hasty retreat from Iraq’s omni-corrupt Common Seawater Supply Project (CSSP) where the desire for huge oil profits was trumped by fear over massive reputational damage, Western international oil companies (IOCs) have rushed for the exit from Iraq’s oil sector.

The independent risk agency, Transparency International (TI), has highlighted for many years in its ‘Corruption Perceptions Index’ publications, Iraq usually features in the worst 10 out of 180 countries for its scale and scope of corruption. “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery have led the country to the bottom of international corruption rankings, fuelled political violence and hampered effective state-building and service delivery,” TI states. “Political interference in anti-corruption bodies and politicization of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to curb soaring corruption efficiently,” it adds. 

The sheer enormity of the scale of the reputational risk to Western IOCs can be judged from the massive potential rewards that they are willing to leave behind in Iraq.  As analyzed in depth in my last book on the global oil markets, in 2013, Iraq launched its ‘Integrated National Energy Strategy’ (INES), which formulated the three forward oil production profiles for the country. The INES’ best-case scenario was for crude oil production capacity to increase to 13 million bpd (at that point by 2017), holding around that level for five years and thereafter gradually declining to around 10 million bpd for several more years. The mid-range production scenario was for Iraq to reach 9 million bpd (at that point by 2020), and the worst-case INES scenario was for production to reach 6 million bpd (at that point by 2020). 

These figures were based on solid facts and figures from several renowned and trusted external sources, as also analysed in my last book. According to a limited-circulation report produced at around the same time by the International Energy Agency (IEA), a 1997 detailed study by respected oil and gas firm, Petrolog, had already provided figures that were in line with the Iraq Oil Ministry’s later statements that the country’s undiscovered resources amounted to around 215 billion barrels.

However, the concerns of such soft-skinned accountancy types in the West are of little interest to China or Russia and they are now taking the lead on developing Rumaila and West Qurna 2, respectively. The middle of last month saw the China Petroleum Engineering & Construction Corp (CPECC) sign a US$386 million engineering, procurement, and construction contract to build a two-train oil processing facility at Quraynat to develop production in the southern part of the Rumaila field, Iraq’s largest oilfield. The intention is that each train will handle around 120,000 barrels per day (bpd) of oil from the field’s Mishrif formation. 

There is much potential left in the area as the Rumaila field, despite it having already produced around 80 percent of all of Iraq’s cumulative oil production to date, together with the Kirkuk field, has an estimated 17 billion barrels in proven reserves. Jointly run by a venture in which China’s PetroChina – the listed arm of the state-owned China National Petroleum Corporation – has a 46.37 percent share, Rumaila was always intended to produce at least 2.1 million bpd, compared to the current 1.4 million bpd, an increase of 0.7 million bpd. 

According to a source close to the Iraq Oil Ministry spoken to exclusively last week by OilPrice.com, China intends within the next six months to dramatically increase the water-injection capabilities at Rumaila. These will build on the already successful renovation of the Qarmat Ali Water Treatment Plant by another senior partner in the field, BP (with a 47.63 percent share). The Qarmat facility is now capable of treating up to 1.3-1.4 million bpd of river water, allowing for greater extraction of oil from the field’s Mishrif reservoir (triple the amount, in fact, that was extracted in 2010). According to industry figures, Rumaila requires around 1.4 barrels of water for each barrel of oil produced from the north of the field, whilst the Mishrif formation in the south will require much higher water injection rates to support production. 

For Russia, significantly increasing oil production from West Qurna 2 was already achieved back in May 2019, but it only told the Iraqis that once the Iraqis discovered it themselves, as exclusively revealed by OilPrice.com. The key events that shaped all the subsequent shenanigans on both sides occurred in and around August 2017. At that time the government’s finances were still in tatters from the “loss” – as it had been announced in 2015 by then-Oil Minister, and later Prime Minister of Iraq, Adil Abdul Mahdi – “of [at least] US$14,448,146,000 in cash compensation payments” connected to its oil sector from 2011 to 2014, as also analysed in depth in my last book

Consequently, the Iraqi government asked Lukoil if it would increase production from West Qurna 2 from 400,000 bpd to, in the first instance, 480,000 bpd, and then quickly to add at least another 650,000 bpd, as 1.13 million bpd was the production target for Phase 3. At that point in 2017, Lukoil was receiving just US$1.15 per barrel recovered of remuneration, the lowest rate being paid to any IOC in Iraq at that time. Also grating on the Russian company was that because of the ongoing cash crunch in Iraq, the Oil Ministry still owed Lukoil around US$6 billion for various unpaid compensation on recovered barrels and other development payments.

According to the Iraq source, Lukoil made all these concerns clear to Iraq’s Oil Ministry at the beginning of August 2017. The Ministry assured that it would receive the US$6 billion that it was owed expeditiously and that a higher compensation rate per barrel would be looked into as soon as was feasible. What Lukoil did not tell the Iraqis was that it had already done several test runs at West Qurna 2 in June and July 2017 in which it sustained production of 650,000 bpd.

Following various threats and counter-threats between the two sides, February 2019 saw the visit to Iraq’s then-Prime Minister, Adil Abd Al-Mahdi, of Russian President Vladimir Putin’s Special Envoy to the Middle East and Africa, Mikhail Bogdanov. In a meeting described as “tense” by the Iraq source, it was nonetheless the Russian plan to safeguard what it had in southern Iraq to add to the central role that Rosneft had in Kurdistan and to prevent the U.S. from pushing it out of either. Consequently, it was decided that the original development plan would be adhered to on both sides. “Since then, there has been some slippage on both sides but as of now the plan is back in place,” concluded the Iraq source. 

In short, Iraq can count on an additional 0.25 million bpd from West Qurna 2 within weeks. Added to the extra 0.7 million bpd from Rumaila, this will increase Iraq’s total oil production by 0.95 million bpd within months. This, added to October’s production figure of 4.561 million bpd is 5.511 million bpd, leaving 1.489 million bpd to the target of 7 million bpd. For a country so abundant in easy-to-reach oil, this is a small step. For a country like Iraq, it is a giant leap.

By Simon Watkins for Oilprice.com 

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  • Mamdouh Salameh on November 23 2022 said:
    Based on the size of oil reserves, costs of production and prolificity of wells, Iraq is certainly capable of challenging Saudi Arabia’s regional oil dominance as discussed below.

    1- In terms of reserves, Iraq sits on the world’s largest oil reserves estimated to exceed 400 billion barrels (bb) of oil between proven and semi-proven reserves according to international experts who assessed Iraq’s oil potential. Moreover, only 70% of Iraq’s territory has been explored for oil. By comparison, Saudi proven reserves are estimated now at 40.4 bb according to my research and calculations and not 264 bb as the Saudis have been claiming for the last twenty years.

    2- Iraq has the cheapest production costs in the world estimated at $2-$3 a barrel compared with $4-$6 for Saudi Arabia.

    3- Iraqi wells are the most prolific in the world with average Iraqi well production amounting to 13.700 barrels a day (b/d) compared with 10,200 b/d for Saudi wells and 17 b/d for the United States’ conventional wells (not shale oil wells).

    4- Of more than eighty major oilfields discovered in Iraq, only about twenty-one have been partially developed. In contrast, more than 90% of Saudi current production comes from five giant but aging oilfields (Ghawar, Safaniya, Hanifa, Khurais and Zuluf ) which are more than 74 years old and which are being kept producing by huge injections of water.

    5- Based on its potential, Iraq could be expected to lift its production to 6.0-7.0 mbd by 2027. By then Saudi production would have declined to 5.0-5.4 mbd.

    However, for Iraq to achieve this task, it urgently needs political stability, transparency, huge investments and major renovation of its oil infrastructure including expanded oil export terminals on the Gulf, repair of the Iraqi-Turkish oil pipeline (ITP) from Kirkuk to the port of Ceyhan on Turkey’s Mediterranean cost and the building of the Iraq-Aqaba oil pipeline to the Jordanian port of Aqaba. This takes time.

    Without fulfilling the above conditions, I very much doubt Iraq will be able to lift its production to 6-7 mbd by 2027 or even 2030.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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